Providing Best-In-Class Advice and Best-In-Class Technology with Jed Finn

Jack Sharry: Hello, everyone. Thanks for joining us for this edition of WealthTech on Deck. Today we’re interested in shaking things up on our podcast. We have mixed it up from time to time with different formats and different approaches. For today’s podcasts, we’re really going to make a change. Today I’m going to present as a podcast the interview I did with Jed Finn, who is the CFO of Morgan Stanley Wealth Management. We did this back in May at the Next Chapter Rockin’ Retirement conference. It’s gotten an incredible number of hits online and through social media. Some of you have seen this, but if you’re like me each and every time I listen to Jed Finn talk about Morgan Stanley strategy. I continue to learn something while being blown away. This guy’s smart. So here we go with Jed Finn, he’s gonna lay out the Morgan Stanley’s strategy they now call the connected client journey. Enjoy. Hello, everyone. Thanks for joining us for what I think you will find to be a fascinating conversation on the future of financial advice. Today we will speak with someone I’ve been following for many years. Jed Finn is the Chief Operating Officer of Morgan Stanley’s wealth management business, and is also head of the corporate and institutional solutions business. He recently became a member of Morgan Stanley’s operating committee, Jed welcome, and good to have you on Next Chapters Rockin’ Retirement.

Jed Finn: Thanks for having me.

Jack Sharry: So did you ever see some very important parts of Morgan Stanley, let’s start with you describing your role.

Jed Finn: Sure, I have two main responsibilities. The first is I’m the CEO of wealth management, as you said. And in that capacity, it’s pretty much general CEO stuff. So resource allocation, budget, p&l management, etc. And then the second is, as you said, head of corporate and institutional solutions, which is a business we created on the back of our Solium acquisition to manage all things as it relates to the b2b part of the platform. So Morgan Stanley at work, institutional consulting, etc.

Jack Sharry: You were recently interviewed by Barron’s where you explain the Morgan Stanley strategy in some detail. For our viewers who are curious about the future of financial advice, I highly recommend you read the article which appeared in April 1 issue of Barron’s, in a different Barron’s article that appeared in 2018. In the sacristy in his co president of Morgan Stanley was quoted as saying back then that you have 2.5 million relationships and about two and a half trillion in assets. And your growth strategy was to grow your assets by demonstrating value to your clients through the use of technology during the assets that your clients held elsewhere. And I recently listened to James Gorman on his earnings call. And as he reviewed last year’s results, Morgan Stanley raised 430 billion in net new assets, while expanding from two and a half million relationships a few years back to over 15 million relationships. So first of all, congratulations. And next. How do you do? Did you achieve such strong results?

Jed Finn: Thank you. That’s a multi layered question. So take it into pieces. So if you take a step back from a strategy perspective, we always thought that the future of wealth management was going to be the combination of Best in Class advice, and Best in Class technology. And we had the advice piece, and we’re proud of how our advisors perform on the various rankings, and most importantly, how they serve their clients. But we had if you take it all the way back to the integration between Morgan Stanley and Smith, Barney, it took us a couple of years to dig out of that. And so in the mid teens, we took a step back and say, well, we’ve delivered in terms of the advice capability, but how do we support that with technology. And so we embarked on essentially a spending spree over four or five years where the way we took a step back and thought about it was we wanted to build technology solutions that can address needs of our clients and advisors individually. But we also wanted them to work together, right. So for example, GPS, which is our goals, planning solution is a really important capability for us. Because what we’re finding as it relates to planning is advisors, we’re spending, you know, however many hours building the plan, and then two or three or four times that and actually implementing it, because taking a 6040 recommendation and applying it across a whole bunch of accounts with different securities, different tax treatments, different embedded gains, is actually a much more complicated problem than people had known in the past. And obviously, we’ve got some great software that helps us with that. But what we did is we built an ability to actually implement it as efficiently as possible push button, right. So that’s one capability. Another example is we know that clients have assets in different places and not all of them. To be in solid, so we wanted to have an asset held away, or asset aggregation capability, which we implemented so that advisors could see the entire picture when they were giving clients advice. A final example is on the risk management management side to have an institutional quality capability like Blackrock Aladdin, which we implemented, we thought would give our clients a unique picture as to the risks they were facing and the exposures they had in their portfolio. So each one of those things, by itself solves a specific problem for a client or advisor. But they’re also designed to work together because GPS, as you know, is a great discovery tool planning in general is a great discovery tool, because the client says, Well, I want to have X amount in income in retirement and we say, well, you don’t have the assets to deliver that. And then oftentimes, it exposes the fact Well, there’s another pool of money, here, there’s an inheritance there, there’s a place to kind of increase the asset base. So it’s a discovery tool, then if it’s not here, we can put it in the asset aggregation so we can actually see it. And then the third step is actually running Aladdin on those assets held away and identifying some of the risks that clients might not even know that they’re taking, that we can point out. And the thinking is, well, if we can show them risks that other people can’t, because they don’t have access to the same sophisticated tools, it creates this burning platform for consolidation. And so we talked about a lot back to your question and 2019 is, we thought the industry is moving towards more consolidation, as I mentioned in the article, as well. And we wanted to be the consolidate or not the consolidated team. And so if you fast forward today from 2019, to let’s call it end of full year 2021, and up into the first quarter of 2022, as a result of the consolidation, but also as a result of the capabilities we’ve bought, and the capabilities we have built, we’re now sitting at just shy of 5 trillion. But as you correctly point out, instead of two and a half million clients, because of the expanded relationship footprint we’re sitting at, it’s actually 16 million clients, you shaved off a million, but 16 was now holding 10 trillion in assets held away, right. So when we used to say we can double the size of the firm without adding a single relationship, when we got two and a half trillion. Now we can triple the size of the firm without adding a single new relationship. And we’re sitting at five. And so it’s a really exciting time for us, because the growth opportunity in front of us has grown even faster than the asset base has.

Jack Sharry: That’s great. We’re gonna get into a little bit more of that. But as I recall the numbers in 2019, you had 98 billion in net new assets. Two years ago, you had 206, I think it was and then last year, foreign 38. We’ll talk some more about that. But clearly, doubling every couple of every year actually, is quite a feat. So an area that you described in your Barron’s interview is the convergence of wealth management, and the retirement DC workplace business. You also describe your how you’re integrating e-trade Solium, Eaton Vance parametric, those acquisitions, as well as a partnership with the power invest well, and I know you will continue to do extensive work in building your wealth management platform, the thing I found so interesting is you were able to generate significant net new assets. And yet you were still in the process of integrating all these pieces. So if you want to talk about your acquisitions, and the convergence of wealth, and retirement, and how that’s coming together around your wealth management platform and strategy, and what does it look like as these elements become more fully integrated and coordinated?

Jed Finn: Sure. I appreciate the question. I appreciate the summary of our net new assets, I’m going to bring you to our end of year performance review that we have as a business since you’re right, so look, I think the way to best understand it is again, back to that kind of mid teens period when we had finished integrating and we’d started the investment in best in class technology that I talked about. But we still had this lingering question around or what are we doing for the next generation. And there was a lot of discussion at the time as well, maybe we should have this knee to digital offering as some of our peers did. But we as a leadership team rejected that, because we didn’t feel like we had anything that was compellingly differentiated at the time, we hadn’t been investing in a digital brand. We didn’t have an infrastructure that could even support the online account opening process at the time. And unlike some firms who’ve been successful in the space, we weren’t as attached to a massive retail bank that has, you know, one out of every two households in the US as a customer. And so, for us, it was unlikely to be anything beyond our fair share. And maybe not even that given how much execution there is and how much risk there is in kind of building something like that. At the same time specifically as it relates to our workplace offering our equity plan admin software. We started to hear the same refrain from our clients, which is we love the advisors and we love the firm but software’s lagging, what exists out there in the industry. And if you don’t fix it really hard for us to continue to partner with you. And that’s what prompted the relationship with Solium, the white label relationship whose product Shareworks is, you know, cloud based, and its software as a service. And it’s almost infinitely configurable. But it wasn’t customized for every client. So it scaled. And when we did that white label agreement, what we saw is not only were the clients really happy about the new offering, but we started to win new business faster together. And it’s back to this theme of Best in Class advice, and Best in Class technology. And we looked at the actual participant base, and after an after we would when the client started to ask us, Well, what can you do for us? Can you provide, you know, education, wellness, etc. And that participant base was 20 years younger than our average Morgan Stanley client. And where we do have something that’s differentiated is in the b2b space, right? That’s the heritage of Morgan Stanley. That’s how the firm grew up helping. The largest companies in the United States and globally really address their most critical strategic problems. And so by putting a b2b capability within Well, within this broader Morgan Stanley infrastructure, and having it give us access to a client who was earlier in their wealth accumulation phase, it kind of rounded out the pieces of the strategy that we felt that we were missing, we had the high net worth side, we had the technology, we didn’t have a value prop or a distribution channel for that next generation. And so we started, we obviously bought as opposed to partner. So that was a decision we made in 2019. And we started investing behind those relationships. Obviously, on the Etrade side, there’s an equity admin capability called equity edge. And depending on who you ask, it’s kind of number one, number two, number two, number one, there’s benefits administrators who are, you know, absolutely diehard Shareworks fans, and there are others that are absolutely diehard equity edge fans, which is why we’re keeping both. But now when you think about the different services we can deliver on the workplace side, the strategy for us, and we talked about this a lot in Sharon mentioned on the earnings call a couple of weeks ago is we think of it as a big asset acquisition funnel that starts either in the workplace or with the self directed investor on the E trade platform, but ultimately is designed to end up in a full service advice relationship. And not every client is ready for full-service advice relationship right now. And that’s totally fine. We have the ability to grow with those clients. But by building relationships early, we think it increases our likelihood of being there when it’s time to consume that advice. But we think about that funnel now is having three steps to it. Number one, is we want to maximize the number of potential clients who go into the top of it. And we do that through continuing to win these b2b mandates, which is why we’re investing in the stock plan sides why we’re investing in the retirement side, and we’ll talk about that shortly. Step number two, is we want to then build trust and credibility with those potential clients. And we do that by giving them access to all of the Morgan Stanley resources that we have through our training and education, content, tools and analytics, access to investment professionals and investment expertise. When required, we have a financial wellness platform that delivers much of this. And the goal for us is we want them to feel like they’re a Morgan Stanley advice client even before they get to step three of the funnel, which is doing the actual conversion. And the way we do that is by connecting the right workplace participant or right self-directed investor. And I can talk a little bit more about what that means, but to the right advisor at the right time, positioned in the right way. And what we’re focused on doing now in terms of an investment and build up process is just increasing our capabilities. At each step in the funnel, you asked me about retirement platform, specifically in some of the services. So I’ll just add, from a b2b perspective, we think what we’ve put together is differentiated. And we think it’s differentiated because we’re the only firm who can deliver cradle to grave Corporate Services where we can actually grow with a company at every step in their lifecycle, right. So when it’s just a couple of folks in the garage, they can use share work startup, which is essentially a self service cap table management tool. And when that private company becomes more complicated, and they might issue new shares, raising money have different voting structures, we put them on Shareworks Private which can also facilitate liquidity events. So we went from zero to one of the leaders in tender offers in just two years, we can do auctions, we can do control trading programs. In fact, we’ve already hooked those up to E trade. So now that liquidity is dropping into an E trade account where we can then build relationships that way as well, when it’s time to go public. We’re associated with a world class investment bank who can manage everything around the IPO or the DPO. Back in the day where they used to have IPOs, since dried up a bit recently, but the capability that exists, and then from the wealth side, we can do that private to public transition seamlessly. So going from a cap table management capability directly into a public equity plan admin, we can do the 10 B, five ones for the executives, we can do the DSP for those platform companies. And then we can recommend on the retirement side, we don’t own a record keeper. But we partner with record keepers, as you pointed out, we have the financial wellness platform that I alluded to. And obviously we can manage the individual well of the employees up to their retirement. And so this is unique for several reasons. Number one, because we can deliver every sleeve in the offering, we can be incredibly price competitive for anything that we’re doing. But the reality is we actually don’t care about the economics and the b2b part of the funnel, because the only reason why we’re in these businesses is to build relationships with the participants. And number two, from a corporate buyer perspective, you know, for them, it’s incredibly easy experience, because they’re with the same partner at every step of the way. And remember, it’s not strategic to the company, right? It just has to work. They’re not a better manufacturer, or technology company, because t
hey’re using one equity admin platform versus the other, it just has to work. And so for them to be able to partner with a company that has the scale and brand and credibility and resources of Morgan Stanley, it’s a very comfortable buying experience. And then I would say three, most importantly, from a client perspective, everything is within the walled garden of Morgan Stanley. So if you’re an advice client, and you have a self directed relationship, and you work at a company where share works, or equity edge is the equity admin platform, and you’re holding assets away back to the other part of our conversation, all of that information can be piped in to your online portal in real time updated dynamically, and you and your advisor can have a differentiated conversation than you could anywhere else. And so we think what we’re building is really powerful. We have very strong competitors in each of those sleeves, and one or two of them can do one or two of what I talked about, but nobody can go from, you know, early stage startup, to late stage startup, to going public to doing all those other services to managing the investment portfolio and having wealth management across the wealth spectrum from self directed on the digital side all the way up to family office. And we think that what we’ve put together is a differentiator.

Jack Sharry: Well, I’ve been a real student at Morgan Stanley for a long time, he used to work there way back when. And dazzled by the strategy, just you’ve explained it far beyond my wildest imaginings, frankly, also your ability to execute, because you’ve made this happen in pretty short order, bring it down to the base level at the client level. Ultimately, what they care about is getting better outcome. They’re looking to improve what the what they’ve assembled, and certainly without the different capabilities you’ve described, they’ve there, that’s all available and ready to be accessed. But if I were to boil it down, if you’re gonna improve outcome at the client level, there’s really three ways to do that cost risk and tax. So you’ve already talked about BlackRock, so Latin class, frankly, your cost competitive across the board, really. So the main thing that you have left and I know you’re doing a bunch on this is taxes. So talk a little bit if you would get around what you’re doing around the issue of taxes, the single biggest cost that investors incur?

Jed Finn: Sure, as you know, better than I do, you know, asset location, intelligent withdrawal, tax loss harvesting, it’s two, three, sometimes even 400 basis points of annual outperformance depending on the specific context. And what we found when we started this journey. And you know, life yoga has been a great partner to us. What we started when we started this journey is people just kind of assume away the friction, but in reality, you know, it can pay for a completely different pricing and cost model if people are just have awareness and can actually do something about it. So we’ve embedded this concept in everything we’re doing. And there’s a bunch of different levers that we’re pulling on, let’s just take intelligent withdrawal, which is something that you’re helping us with, you know, the question about, I need to raise $50,000, you can do it the blunt way, which is just, you know, looking at your overall last asset allocation and kind of skinning or it can be a very, very complicated transaction, because you have to look across different tax lots times the number of securities times the different accounts, with the different tax treatment and run multiple comparisons based on how much and so finding that right combination to minimize the tax burden is incredibly analytically intense, but it’s something that we’ve recently rolled out out. And it’s something that we’re starting, particularly in this environment where there have been so many gains over the last, you know, 1824 months, we’re starting to see huge uptick. And now we’ve got, you know, 1000s of advisors a month, using the product that we put out there. Another example, obviously, as on the custom indexing side, we have relationship with parametric, as you know, who’s a leader in custom indexing and embedding some of those capabilities in our core portfolio construction allows a lot more flexibility in terms of both how you implement the portfolio at the beginning, but then also how you realize gains and losses over time. And then from a product perspective, there’s a number of things that were either live with now, or that we’re continuing to deliver, you know, exchange funds, which is not talked about broadly, but can be a very effective cost basis step up tool on the high net worth side, opportunity zones, you know, private placement, Universal Life and annuities. And so there’s a number of the tax strategies that we’re continuing to roll out and innovate with a number of our partners for the benefit of our clients.

Jack Sharry: One of the things that’s interesting, there’s a couple of demographics, one already in place, that is the 10 to 12,000, people retiring daily, the baby boomers that are, although starting to see reports that they may be going back to work, we’ll see how that plays out. And then the next generation just reached the red where the next generation will actually have more money than the baby boomers. So there’s lots of buddy looking for a home. And one of the things that you’re describing is how you connect and coordinate different accounts, different products, whether it’s on the EU, where they started an E trade, or they start at your workplace offering or your wealth management, they all sort of meet in the middle, the platform that you’ve developed, the wealth management platform, really has been designed to be multi account to be tax smart to be risk aware, in how to manage that money. So talk a little bit about where you are now. And where you see this going. I imagined it’s only gonna get better. But maybe if you describe how this because it’s no small thing, you’re the first and only by the way that have really pulled this together across the industry. Where are you now? And where do you see it going in the future. Because if I were a competitor, I’d be scared.

Jed Finn: That’s kind of you. Look, this notion of you know, people have a separate bucket for retirement assets, and then a different bucket for consumption. Well, in practice, that may be the case, the reality is, you know, if you do this, that maybe at the highest net worth, when you’ve got, you know, intergenerational wealth, then there’s something that’s truly not retirement, but the rest of it is retirement. So this dividing line that says, you know, only what’s in an IRA or a 401 K, we don’t think is actually how people think about their money. And there’s a lot of work that we’ve done that proves that out, which kind of then leads to the conclusion that to be big in the space, you actually have to be able to address client needs, across all advice, preferences, and across all, you know, investing types. And that’s kind of been core to the strategy there just as an anecdote to maybe bring it to life with the E trade side. You know, they’re best clap clients. And they talked about this publicly, before the acquisition, where’s the active traders, the people do over a certain amount of trading per month, they generate the most economics to have the most money on the platform. And as we were putting things together, there was a concern around well, you can’t touch those guys, because those are the ones who have driven on the economics and they self-selected to be at a self-directed platform, they’re trading themselves. It turns out as we’ve exposed the resources of Morgan Stanley, whether it’s the access to best in class advisors, or some of the differentiated products that E trade hadn’t had access to before, on the old side, donor advised fund structure, things like that. The biggest users of that, and the people who raised their hands and brought money over was the active traders. And the point that I’m making is that just because you’re an active trader on a specific platform, doesn’t mean you’re an active trader in life. And this traditional notion in the industry, of well, there’s self-directed, and there’s validators. And then there’s delegators, we don’t think actually holds up over time. We think that people have different preferences for advice, consumption with different risk budgets, and we need to be able to deliver all of it or somebody else’s going to it’s a quarter the strategy for us has been, from a service perspective, not from a distribution perspective, but from a service perspective. Make sure we can meet clients where they are across that entire spectrum. So you can start with self-directed investing, and we would say check because of the E trade platform and then you’d say there are people who want to dip their toe in the digital advice water don’t want to talk to a lot of people. I’ve never been bullish about the robo environment. I’m still not but it does mean The need for a subset of people and so we have to have it for those subset of people, we deliver that through E trade Jack, then you talk about a remote adviser model, which has gained a lot of traction and I think serves a very specific set of wealth and client preferences. We do that through the Morgan Stanley virtual advisor. So I’d say check on that for the, you know, high net worth, folks, we have our financial advisors for the, you know, ultra-high net worth, folks, we have our PW A’s, you know, the financial advisors who specialize in 20 million plus households, and for the, you know, multi 100 million multimillionaire families, we recently launched a family office offering, which went from essentially 02 years ago to over 25 billion in assets, and a big pipeline of interested clients who are incredibly receptive to the idea of combining best in class, investment banking and institutional coverage regime delivered through the ISG business with a best in class wealth management capability, all under a single contract all on a single platform that can bring in assets and advise on assets held away. And that’s something that we’re really excited about. So whatever the client’s preference is, we’ve got the ability to serve it. And retirement is just one of the use cases that we can deliver. Now, there is a distribution angle to retirement, which is why we have been aggressively investing in restructuring the relationships that we have with our third-party record keepers, doing some cool brands, and really investing in the wellness behind it. Because, as we’ve talked about, you know, clients who are just set and forget, are probably doing themselves a disservice. Yet, that’s the most likely outcome, as you know better than I do in corporate retirement plans. And so we’re running trainings and events and talking about rebalancing and trying to deliver value so that when the client is ready for an advice, conversation, we can be there. And so that’s how we think about the 401k piece, it’s more of a distribution lens versus, you know, serving specific retirement loans.

Jack Sharry: So I’ve heard James Gorman, the Chairman and CEO of Morgan Stanley and Andy Saperstein, co-President describe Morgan Stanley as a category of one, I’m going to take a shot at, see if I get this right in terms of what that might mean. So category one is all the stuff you just said, which is awesome, just mind boggling in terms of accumulating all that, frankly, in fairly short order. But I think the secret sauce, the magic wand, is that you coordinate all that. In other words, it’s not silos separately, set up, capabilities, products, accounts, segments, however you want to describe it, you really coordinated all that seems to reside, or fundamentally or ultimately come down to the wealth management platform. But describe if you would, what does category of one mean? Did I come close to describing it?

Jed Finn: Yeah, I think I think you got very close, I think the main point to us is it’s tough to pick out somebody who competes with us and all of the businesses and in in, I was laying out the b2b case. But even if you take a step back to analysts have a hard time like, are we an investment bank? And should we get a Goldman multiple? Well, no, because there’s a massive wealth management business. We’re also not, you know, pure wealth management firm, like some of the folks out there. We’ve got a investment management capability that’s grown significantly. And I think, if you put it all together, we’re in the advice business. And we can provide advice to clients, whether they’re institutions or individuals, institutions, or individuals or governments. And we can provide access. And so that’s how we think about it. And there aren’t really any other firms where if you line up the sets of capabilities that we can deliver, they match up against all of those capabilities. And within the wealth management side, again, we touch all those different service boxes, and we also touch all the different distribution channels. And we think that’s unique as well. And so that’s what we’re continuing to invest behind.

Jack Sharry: Well, as I promised, when we got started with our conversation, I invited our guest to check out the future of financial advice on wealth management. And the you’ve done an awesome job of explaining that appreciate this conversation, very illuminating. as much of a student as I tried to be I learned a bunch on this in this discussion, so very exciting for our industry and the public at large as other firms will attempt to compete and catch up with what Morgan Stanley’s doing so from where I sit, since this is a conference on retirement, looks like retirement in America is on its way to be better served. So Jed, I want to thank you for the time and insights. I really enjoyed it.

Jed Finn: Thank you very much for having me. Appreciate the conversation. Appreciate all the kind words and I appreciate the partnership as well.

Jack Sharry: Terrific. Thanks. Thanks, everyone. I hope you enjoyed it as much as I did I have since this first came out, I’ve watched a number of times and again, I’ve learned something each and every time. If you like this level of content, this quality, this kind of incisiveness and insightful view of the industry and the strategy of a particular firm and industry leading firm. Please join us at our website lightfield.com. We got a lot of good content, a lot of stuff around what’s happening in our industry today and what’s gonna happen over the coming years. So enjoy lifeyield.com Look forward to seeing you on the next WealthTech on Deck. Thanks so much for being here.